Demand Futility and the Newark Country Club

In Jennifer L. Stritzinger v. Dennis Barba et al., Stritzinger, a non-dues-paying member of nominal defendant Newark Country Club (the “Club”) brought derivative claims against the twelve members of the Club’s board of directors (the “Board”) for breach of fiduciary duty and the appointment of a receiver related to certain decisions the Board elected to take in light of the Club’s financial difficulties.

The Club operated at a deficit for a number of years preceding the litigation at issue.  Although operating at a loss, the Club rebuked numerous offers to purchase and develop the Club’s land.  Without sufficient cash flow, the Board considered several options to raise financing for club operations.  The Club’s members discussed four options at a “town hall meeting.”  The options were (i) merging with another club; (ii) selling the Club to a land broker but allowing the Club to continue its operations for ten years; (iii) working with the city of Newark for it to purchase the development rights of the property; and (iv) forming Newark Country Club Mortgage Company, LLC to make a loan to the Club.  The Club decided to form the LLC to make a loan to the Club. The loan was secured by the Club’s land with an interest rate of 5.75% and was to be used to repay certain of the Club’s short-term obligations but would not be used to address the issues surrounding the Club’s long-term financial stability.

Five of the twelve Board members invested in the LLC.  These five members recused themselves from the vote authorizing the loan.  After Stritzinger’s Motion to Expedite was denied and two amendments to the Complaint, Defendants moved to dismiss for failure to make a pre-suit demand on the Board and for failure to state a claim.

The Court agreed with Defendants and dismissed Plaintiff’s claims. The Court’s inquiry started with demand requirements in derivative cases.  The Court noted that Stritzinger failed to make a demand or allege demand futility. Under the Aronson test, to show demand futility, Stritzinger was required to plead “particularized factual allegations that raise a reasonable doubt that (1) [a majority of] the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.”

Stritzinger alleged that the remaining seven members of the Board were not disinterested because they acted in bad faith when they approved the loan transaction and thus faced a substantial threat of personal liability for taking the action. Although the Court questioned whether a substantial threat of personal liability applied to the first or second prong of Aronson, regardless of what prong that factor applied to, Stritzinger did not allege demand futility.  The Court found that Stritzinger’s complaints boiled down to “a disagreement with the substance of the decision the Board made to approve the transaction.”

As to the receiver count, the Court stated that without a statutory basis for the appointment of a receiver, the Court could only appoint a receiver in cases of, “fraud, gross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent danger of great loss which cannot otherwise be prevented.”  The Court found that none of the allegations in Plaintiff’s Second Amended Complaint reached anywhere near the level necessary to appoint a receiver and dismissed the Complaint.

Read the full opinion here.

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